ECB Urged to Exercise Caution on Rate Cuts as Neutral Territory Nears
Frankfurt, Germany - European Central Bank (ECB) Governing Council member Joachim Nagel has cautioned against hasty interest rate cuts, particularly as borrowing costs approach neutral levels.
Neutral Rate Calculations
Bundesbank staff estimates suggest the neutral rate to be within the range of 1.8%-2.5%, slightly below the current deposit rate of 2.75%. According to Nagel, this proximity to neutrality necessitates a gradual approach to monetary policy.
Economic Uncertainty and Data Dependence
Nagel emphasizes that uncertainty in the economic environment warrants caution. He believes that data should guide the ECB's future decisions rather than hasty actions.
Inflation Considerations
While inflation remains below the ECB's 2% target, concerns persist about potential upward pressure from energy costs and trade tariffs. Additionally, weak economic growth in the eurozone poses a risk of pulling inflation below target.
ECB Rate Projections
Analysts and investors anticipate another rate cut in March, but the path beyond remains uncertain. Recent remarks by officials suggest a range of estimates for the neutral rate, from just below 2% to 3%.
Neutral Rate Concept
Nagel acknowledges the utility of the neutral rate concept as an indicator for cautious policy rate adjustments. However, he warns against relying solely on uncertain estimates and emphasizes the use of various economic indicators for ECB assessments.
Avoiding Wrong Steps
Nagel cautions against abruptly choosing the midpoint of potential neutral rate ranges, as it may not represent a balanced approach.
Caution and Data-Driven Decisions
The ECB continues to monitor inflation risks and economic conditions closely. Nagel's remarks reflect a cautious stance and a data-driven approach as the ECB navigates the complexities of monetary policy near neutral territory.